Can Government Learn to Live With the Sharing Economy?

It's a mistake to try to control or regulate innovation. Think about what happened to the music business.

A Foundation Professor in Arizona State University's School of Public Affairs

In the face of technological innovation, local governments need to evolve into adaptive organizations capable of rapid and constructive response to the resulting societal shifts. Today there is much talk in local government about the effects of the technology-enabled sharing economy, but for the most part government is treating this shift much as the music industry treated the one that disrupted its business.

One of the earliest peer-to-peer (P2P) sharing services was Napster, which between 1999 and 2001 allowed people to easily share music and other multimedia files over the Internet. Seeing its record sales plummet, the music industry reacted predictably and sued for copyright infringement. Napster ceased operations (re-emerging later as an online music store), but the entertainment industry has never been the same. Today we cannot imagine life without being able to download or stream a song, a book, a television show or a movie the moment it is released.

The emerging sharing economy is, in essence, a collection of facilitated P2P platforms in which the resources of peers are identified and disseminated and individual transactions are negotiated. One of the best known and most successful of these is Uber. Despite the ride-sharing service's popularity among their residents and visitors, local governments have responded much as the traditional actors of the music industry did. San Francisco and Seattle are among cities that have sued Uber, citing safety and taxi-licensing concerns. What they are really trying to do is to control innovation and protect tax revenue.

With the sharing economy seeing explosive growth, there certainly is plenty of economic activity at stake. Uber is now valued at $18 billion. Airbnb, the home-sharing service, has grown by 750 percent in five years; last year, 10 million people shared room in their homes with strangers via Airbnb, and a report by Barclays estimates that in a few years Airbnb will be providing over 10 percent of the lodging needs in large cities such as New York, London and Paris.

Another alignment that the sharing economy has fueled is the "gig economy," where "microjobs" are offered to individuals via online marketplaces. TaskRabbit, for example, allows individuals to post errands they would like assistance with. Exec outsources house-cleaning duties. Amazon hosts Mechanical Turk, a marketplace for finding individuals to perform "human intelligence tasks" such as writing product descriptions.

The chief way governments are responding is through regulation. That's unfortunate, as Sarah Cannon and Lawrence H. Summers argue in an article in the Harvard Business Review, because the sharing economy promises significant benefits -- economic, environmental and entrepreneurial -- for local economies. Regulation, they write, "is often the most significant barrier to growth" for these companies.

But everything can't be regulated. Take the emerging P2P currency markets, such as Bitcoin and Dogecoin. These digital currencies that can be traded across the globe have the potential to change the future of money. Neither cities nor states nor countries can regulate Bitcoin transactions. Yet governments are going to have to learn to cope with these new forms of money. There are signs that that is beginning to happen: This year, for example, state legislators in New Hampshire introduced legislation to accept Bitcoin for payment of taxes and fees.

The sharing economy is just going to continue to grow, and governments will be challenged to understand and manage its implications while embracing its benefits. However, governments will be at a significant disadvantage if they wait too long and newer technologies and markets will have already been developed that do not follow traditional models. Think of the following: Uber is the world's largest taxi service and owns no cars. Airbnb provides lodging yet does not own real estate.

How will local governments adapt to these new ways of doing business that are disrupting traditional business models? All we know now is that governments are a long way from even contemplating and accepting this new reality.